Critical Moves And Partnerships Set To Elevate Airline's Global Presence And Profit Margins

Key Takeaways

• Delta Air Lines' push for premium services and loyalty programs aims to boost profitability by attracting high-value customers and enhancing customer engagement.
  
• Efforts in fleet modernization and strategic global partnerships are projected to drive operational efficiencies and expand market presence, supporting long-term growth and financial stability.
  
• Rapid seat growth exceeding demand and reliance on event-driven and external partnership revenues introduce risks to profitability and revenue predictability.

Catalysts

Provides scheduled air transportation for passengers and cargo in the United States and internationally.

• Delta Air Lines’ sustained investment in premium product offerings and service differentiation is expected to boost its profitability margins by catering to the high-value customer segment, thereby positively impacting revenue and earnings per share.
  
• Enhanced loyalty programs, especially with the SkyMiles American Express credit card, aim to deepen customer engagement and loyalty, contributing to increased revenue and profitability through higher spending and customer retention.
  
• Strategic partnerships, such as the one with Riyadh Air, are anticipated to expand Delta's global reach and connectivity, potentially driving growth in international markets and enhancing revenue streams from these collaborations.
  
• Ongoing fleet modernization and operational efficiency initiatives, evidenced by the reduction in nonfuel costs and improved fuel efficiency, are projected to lower operating costs and improve net margins over time.
  
• Delta’s focus on generating strong free cash flow and reducing leverage through debt repayment is likely to fortify its balance sheet, potentially leading to a re-rating of the stock as financial health improves and investment-grade metrics are approached, positively impacting investor sentiment and stock valuation.

Assumptions

• Analysts are assuming Delta Air Lines's revenue will grow by 2.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.5% today to 7.4% in 3 years time.
• Analysts expect earnings to reach $4.8 billion (and earnings per share of $7.65) by about August 2027, up from $4.5 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.0x on those 2027 earnings, up from 5.3x today. This future PE is lower than the current PE for the US Airlines industry at 10.4x.
• Analysts expect the number of shares outstanding to grow by 0.15% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.92%, as per the Simply Wall St company report.

Risks

• Accelerated domestic industry seat growth impacting Main Cabin unit revenue trends could pressure profitability by lowering yields.
  
• Approximately $100 million impact on travel to Paris for the Olympics highlights the risk associated with relying on event-driven revenue, which can fluctuate significantly and impact revenue predictability.
  
• Increased Capacity growth through the summer months has created an oversupply, potentially leading to a decrease in fares and a negative impact on earnings.
  
• Despite a strong demand for air travel, the rapid seat growth exceeding demand growth could lead to diminished returns, affecting net margins.
  
• The reliance on external partnerships, like the one announced with Riyadh Air, introduces execution and geopolitical risk, which could impact future revenue streams and earnings expectations.

Valuation

• The analysts have a consensus price target of $59.22 for Delta Air Lines based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $85.0, and the most bearish reporting a price target of just $40.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $65.1 billion, earnings will come to $4.8 billion, and it would be trading on a PE ratio of 10.0x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $37.32, the analyst's price target of $59.22 is 37.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.